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Regulatory Agenda for European Asset Management and Funds : EFAMA’s Priorities

Regulatory Agenda for European Asset Management and Funds : EFAMA’s Priorities. Presented by Peter De Proft Director General of EFAMA. UAIB, 3 rd CEE Workshop “Challenges of Collective Investment Business in CEE” 27 October 2011 - Kyiv. Agenda. Presentation of EFAMA

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Regulatory Agenda for European Asset Management and Funds : EFAMA’s Priorities

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  1. Regulatory Agenda for European Asset Management and Funds: EFAMA’sPriorities Presented by Peter De Proft Director General of EFAMA UAIB, 3rd CEE Workshop “Challenges of Collective Investment Business in CEE” 27 October 2011 - Kyiv

  2. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • Responsible Investment • FATCA • Complex Products • MiFID Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv

  3. "EFAMA Land" 26 Countries: • 22 EU Members, and • Liechtenstein • Norway • Switzerland • Turkey 56 Corporate Members 19 Associate Members = Investment Management: EUR 13.8 trillion of which EUR 8.1 trillion through over 54,000 investment funds (end June 2011) 3rd CEE Workshop, 27 October 2011, Kyiv

  4. EFAMA Membership Austria: VÖIG Belgium: BEAMA Bulgaria: BAAMC Czech Rep.: AKAT CR Denmark: IFR Finland: FFFS France: AFG Germany: BVI Greece: ETHE Hungary: BAMOSZ Ireland: IFIA Italy: Assogestioni Liechtenstein: LAFV Luxembourg: ALFI Netherlands: DUFAS Norway: VFF Poland: IZFiA Portugal: APFIPP Romania: AAF Slovakia: SASS Slovenia: ZDU-GIZ Spain: Inverco Sweden: FBF – SIFA Switzerland: SFA Turkey: TKYD United Kingdom: IMA Observer Malta : MFIA 26 National Associations + 1 Observer 3rd CEE Workshop, 27 October 2011, Kyiv

  5. EFAMA Membership Allianz Global Investors Amundi Aviva Investors Axa Investment Managers BanquePrivée E. de Rothschild BBVA Gestion Baillie Gifford & Co BanqueCantonaleVaudoise (BCV) BlackRock BNP Paribas Investment Partners BNY Mellon Capital International CarmignacGestion Credit Suisse DekaBank Deutsche Girozentrale Dexia Asset Management DWS Investment GmbH Eurizon Capital F&C Management Fidelity International Franklin Templeton Investments Garanti Asset Management Goldman Sachs AM International Groupama Asset Management HSBC Global Asset Management ING IM Invesco Investec Asset Management IS Asset Management J.P. Morgan Asset Management KBC Asset Management La BanquePostale Asset Management La Française AM Lombard OdierDarierHentsch & Cie Lyxor Asset Management Mirabaud & CieBanquiersPrivés M&G Investments Man Group plc. Natixis Asset Management Nordea Investment Funds Pictet Asset Management Pioneer Global Asset Management Raiffeisen Capital Management (RCM) Robeco Russell Investments Royal London Asset Management Santander Asset Management Schroders Skagen Funds Source Standard Life Investments Limited State Street Global Advisors Threadneedle Asset Management T. Rowe Price International Ltd UBS AG – UBS Global Asset Management Union Asset Management Holding AG 56 Corporate Members 3rd CEE Workshop, 27 October 2011, Kyiv

  6. EFAMA Membership Arendt & Medernach CACEIS Investor Services Clifford Chance Dechert LLP Deloitte S.A. Elvinger, Hoss & Prussen Ernst & Young FIFS Kneip KPMG Linklaters LLP Lenz & Staehelin Loyens & Loeff MDO Services SA Nomura Bank (Luxembourg) S.A. Northern Trust PricewaterhouseCoopers Sàrl RBC Dexia Investor Services RBS (Luxembourg) S.A. 19 Associate Members 3rd CEE Workshop, 27 October 2011, Kyiv

  7. EFAMA’s “Partners in Dialogue” - Europe EU Commission esp. InternalMarket DG EFAMA EU Parliament esp. Committee on Economic and Monetary Affairs (ECON) EU Council ESMA Permanent Representations of EU Member States 3rd CEE Workshop, 27 October 2011, Kyiv

  8. EFAMA’s International “Partners in Dialogue” IOSCO IIFA EFAMA US Treasury I.R.S. S.E.C. 3rd CEE Workshop, 27 October 2011, Kyiv

  9. EFAMA Functioning • Call for Evidence • Working Groups: all Members • Drafts • Common Position  send for comments • Final Draft  send for comments • Board Approval 3rd CEE Workshop, 27 October 2011, Kyiv

  10. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • Responsible Investment • FATCA • Complex Products • MiFID Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv

  11. Political Message at EU Level • After the Financial Crisis, clear political message, enhanced by Euro-government crisis • Self-regulation does not work • Better regulation is necessary to avoid a new crisis of the same proportion or contain it • Aim: more efficient monitoring of systemic risks and better investor protection • EU Commissioner Barnier for Internal Market: Agenda: Implementation of G20 Proposals before the end of 2011 3rd CEE Workshop, 27 October 2011, Kyiv

  12. European Parliament: the Untouchables • New powers after Lisbon Treaty • Post-crisis trauma: taxpayers money • SME statements • Social and budgetary crisis in Europe • Social & Responsible Investment + Corporate Governance Financial Sector Revisited 3rd CEE Workshop, 27 October 2011, Kyiv

  13. Everything is on the Move Remuneration Single MarketAct FATCA Short selling PRIPs AIFMD MiFID EMIR/OTC Derivatives IMD ICSD CRA UCITS IV & V Taxation of Financial Sector ResponsibleInvestment Depositary regimereview Corporate Governance VAT Pensions Audit Policy Supervisory Framework Dodd Frank 3rd CEE Workshop, 27 October 2011, Kyiv Regulatory initiatives with direct influence on EU asset managers and their products:

  14. EFAMA’s Areas of Focus • EFAMA currently focuses intensively on: • MiFID II • ETFs • UCITS IV & V • PRIPs • Pensions Green Paper • EMIR / OTC Derivatives • FATCA • Dodd Frank • Responsible Investment / Corporate Governance • AIFMD • VAT / Financial Sector Taxation 3rd CEE Workshop, 27 October 2011, Kyiv

  15. EU Dialogue Partners • Relations with Commission Services: • e.g. : UCITS IV & V; Corporate Governance; ETFs; Shadow Banking; Pensions; MiFID; Solvency II • Relations with Council: • e.g. : AIFMD; VAT; FTT; EMIR • Relations with ESMA: • e.g. : AIFMD; Structured funds; ETFs; PRIPs • Relations with Parliament: • e.g. : UCITS IV; AIFMD; ICSD 3rd CEE Workshop, 27 October 2011, Kyiv

  16. Wave has fully started & will impact industry even if uncertainty on how this will “go live” Preliminary consultation Rule making National translation/ implementation Today Initiative 2010 2014 2008 2009 2011 2012 2013 • UCITS IV • UCITS V • AIFMD • ICSD • Money market funds • FATCA • Dodd Frank • RDR • PRIPs • MiFID review • EMIR • Supervision • Short-selling • CSR/social entrepreneurship • Contract law green paper • Basel III • Solvency II • IMD review • Revision of IORP • Green paper on pensions • Contract law green paper • SLD • CSD 3rd CEE Workshop, 27 October 2011, Kyiv 16

  17. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • Responsible Investment • FATCA • Complex Products • MiFID Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv 17

  18. AIFMD: Timing Level 1 • 21 July 2011: Entry into force of Level 1 (20 days after publication in the Official Journal) Level 2 and Level 3 • August – September 2011: 2 Consultations by ESMA on Implementing Measures • 16 November 2011: Deadline for advice by ESMA to the Commission • Early 2012 (expected): Commission to submit proposals on Implementing measures to European Parliament and Council • Aim: Level 2 and parts of Level 3 adopted by mid-2012 3rd CEE Workshop, 27 October 2011, Kyiv

  19. AIFMD: Timing National Legislation in Member States • 22 July 2013: Deadline for transposition by Member States into National Law Deadline for the Industry • 22 July 2013: New AIFM and AIF must comply with requirements of AIFMD • 22 July 2014: AIFM existing before 22 July 2013 must submit application for authorisation and comply with requirements of AIFMD 3rd CEE Workshop, 27 October 2011, Kyiv 19

  20. AIFMD: ESMA Consultations on Implementing Measures 2 ESMA Consultations covering implementing measures on: • Scope • Authorisation and General Operating Conditions • Capital Requirements • Conflicts of Interest • Risk Management • Liquidity Management • Organisational Requirements • Valuation • Delegation • Depositaries • Leverage • Transparency • Supervision and Delegation of functions to 3rd Countries 3rd CEE Workshop, 27 October 2011, Kyiv 20

  21. AIFMD: EFAMA Members Priorities EFAMA Working Group has identified as key priorities: • Aim/Benchmark of Regulation • ESMA Proposals seem to aim at regulating funds for retail investors. Benchmark should be regulation for funds for professional investors. Member States may add additional layer for retail investors. • Consultation text boxes versus explanatory text • Important information throughout the explanatory text should be included into the boxes. 3rd CEE Workshop, 27 October 2011, Kyiv 21

  22. AIFMD: EFAMA Members Priorities EFAMA Working Group has identified as key priorities: • Initial capital and own funds, in particular additional capital requirements or PII • Additional Capital should be calculated based on AUM not on Income of the AIFM • Additional Capital should be capped • PII requirements should be better aligned with existing practices in insurance industry • Inducements • Indirect Distribution should not be regulated in the same way as direct distribution • Transparency • Transparency Proposals are designed in a one-size fits all approach with requirements too detailed, burdensome and frequent. • Transparency requirements towards investors also apply to (privately placed) third country AIF and will require disclosure on conditions these funds do not necessarily fulfil. 3rd CEE Workshop, 27 October 2011, Kyiv 22

  23. AIFMD: EFAMA Members Priorities EFAMA Working Group has identified as key priorities: • Depositary • Detailed description of safekeeping functions should be pragmatic, based on best market practices, proportional to the functions and duties of other service providers and not going beyond the requirements of the Level 1 text • Oversight duties should consist in ex-post controls and verifications of the appropriateness of procedures put in place by the AIFM • Definition of “financial instruments held in custody” is crucial • Liability regime: to what extent should a loss of financial resulting from an act or omission of a sub-custodian be considered an “internal” event to the depositary? • Liability regime: the “objective reason” for the depositary to discharge its liability should not be reduced to a pure formality – best interest of investors to be taken into account 3rd CEE Workshop, 27 October 2011, Kyiv 23

  24. AIFMD: EFAMA Members Priorities EFAMA Working Group has identified as key priorities: • Delegation • ESMA Proposals regarding delegation to third countries problematic as they require MoU between authorities to allow among other on-site inspections of EU home MS authority. • Liquidity Management • Gates and Side-pockets, if properly disclosed to investors, should be considered as normal liquidity management tools. • Leverage • Calculation of Leverage according to several methods considered too burdensome. • VAR should be considered as a possible methodology for Advanced Method. Gross method not meaningful and Commitment method must allow for hedging/netting. 3rd CEE Workshop, 27 October 2011, Kyiv 24

  25. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • FATCA • Complex Products • MiFID Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv 25

  26. FATCA: EFAMA’s aim • Minimising the impact of FATCA through deemed compliant categories for certain types of funds • No or limited reporting • No passthru withholding obligation at fund level • A lighter compliance system for appropriate entities encourages compliance whereas a more onerous regime encourages divestment from U.S. assets 3rd CEE Workshop, 27 October 2011, Kyiv 26

  27. FATCA: Notice 2011-34 • Deemed compliant status for certain investment vehicles • Funds where all direct unit holders are PFFIs, deemed compliant FFIs or, broadly, low risk investors • E.g. German mutual fund model • Under continued consideration: • Funds traded on established securities market • E.g. ETFs • Funds with U.S. Person sales restrictions • All direct account holders must be USFIs, PFFIs, deemed compliant FFIs or non-participating distributors • Other direct account holders not permitted • Low risk investors, in particular retirement plans • More information requested 3rd CEE Workshop, 27 October 2011, Kyiv 27

  28. FATCA: Continued concerns of the U.S. authorities • Use of “blockers” to circumvent FATCA • Risk of tax avoidance through “deemed compliant” entities if exemptions are drafted too broadly • Due diligence and enforcement throughout the distribution chain • Customer identification, especially non-financial entities 3rd CEE Workshop, 27 October 2011, Kyiv 28

  29. Key issues • Deemed compliant category for funds restricted to non-US investors • Notice 2011-34 required all direct investors to be PFFIs, deemed compliant FFIs or, broadly, low risk investors • Direct retail investors? • Contractual control of distribution chain through deemed compliant FFIs? • Compliance and enforcement of such contractual controls? Pass-through withholding? • Pre-existing accounts? Redemption? Existing selling prohibitions under SEC rules? • Deemed compliant category for local distributors • Extension of "local bank" status to regulated distributors acting in an FFI capacity • Definition of local? Under EU law unable to exclude EU residents • Size requirement? • Deemed compliant category for retirement plans/low risk investors • What definition would be appropriate? • Platforms; contractual arrangements; umbrella/sub-funds 3rd CEE Workshop, 27 October 2011, Kyiv 29

  30. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • FATCA • Complex Products • MiFID Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv 30

  31. ETFs - Regulatory Activities (I) • FSB Note on Potential Financial Stability Issues arising from Recent Trends in Exchange-Traded Funds (ETFs) – Consultation closed in May • Main concerns for FSB are stability risks, as well as some fund-specific issues (use of swaps and counterparty risks, collateral management risks, conflicts of interest; use of securities lending and related counterparty, collateral risks), plus transparency • Focus for ESMA is on ETFs as UCITS, less systemic risks • Consultation launched in July on Discussion Paper on UCITS ETFs and Structured UCITS links ETF issues to concerns regarding other UCITS (Structured UCITS, “complex” UCITS in general) – Deadline: 22 September 3rd CEE Workshop, 27 October 2011, Kyiv 31

  32. ETFs: ESMA Discussion Paper (I) • General policy issues: • Distinction between complex and non-complex UCITS • Restrictions to retail marketing • Systemic risks • Extension to non-UCITS • ETFs: • Definition • Index tracking issues • Synthetic ETFs: counterparty risk • Securities Lending • Actively managed ETFs • Secondary market investors • Structured UCITS: • Total Return Swaps • Strategy Indices 3rd CEE Workshop, 27 October 2011, Kyiv

  33. ETFs: ESMA Discussion Paper (II) Complex – Non-complex UCITS • Concerns on ETFs are coming together with concerns on “complex UCITS” and Structured UCITS • Obvious link to MiFIDcategorisation of UCITS • ESMA view from UCITS perspective, with focus on synthetic ETFs, structured UCITS and other UCITS employing “complex portfolio management techniques”. Both limitations to marketing to retail investors and warnings mentioned • UCITS Guidelines being considered to split UCITS into complex and non-complex, but approach would not warrant a Level Playing Field. NO comprehensive, horizontal proposals for investor protection • EFAMA members’ position: no UCITS-specific guidelines. All financial instruments should be treated equally, UCITS included. If UCITS are no longer automatically non-complex, criteria in Art. 38 of MiFIDLevel 2 should apply 3rd CEE Workshop, 27 October 2011, Kyiv

  34. ETFs: ESMA Discussion Paper (III) EFAMA members’ positions on other issues: • ETF Identifier • Should ETF definition be limited to UCITS? How to capture only true ETFs? • Identifier should not distinguish between synthetic and physical ETFs– disclosure in KIID and prospectus • Collateral for synthetic ETFs – no further regulation necessary • Agreement to extension of collateral rules for OTC derivatives to securities lending • Concern for treatment of secondary market investors and their right to redeem – investors have right to redeem with the fund and situation of exchange-traded funds is not different from other funds 3rd CEE Workshop, 27 October 2011, Kyiv

  35. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • FATCA • Complex Products • PRIPS/MiFID Review/IMD Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv

  36. PRIPs/MiFID Review/IMD Review: Next Steps • Legislative approach: • One horizontal measure (PRIPs) for investor disclosure only; • Selling rules included in the reviews of MiFID and Insurance Mediation Directive (IMD) respectively. MiFID as benchmark for rules on distribution of insurance products in IMD. • Maintaining coherence among legislative proposals will be very challenging for the Commission and regulators, especially between MiFID and IMD 3rd CEE Workshop, 27 October 2011, Kyiv

  37. PRIPs – Key Issues PRIPS Key Investor Information Document (KIID): • Harmonised pre-contractual disclosure based on UCITS KID. • Tailored to product characteristics but with common key elements allowing comparison among PRIPs Key Issues: • Scope and PRIPs definition, based on economic elements and packaging – no fixed lists or legalistic definition, which would allow loopholes and arbitrage • Inclusion of insurance products, in particular annuities • Inclusion of pensions • Inclusion of structured deposits • Same key elements as UCITS KID 3rd CEE Workshop, 27 October 2011, Kyiv

  38. MiFID II Draft – Key Issues Directive (I) • Advice: introduction of advice «provided on an independent basis»: • Assessment of a sufficiently large number of financial instruments, diversifiedwith regard to type and issuer, not limited to instruments issued or provided by entitieswith close links to adviser • No inducements (except for training) • Proposals in line with Consultation • Information to clients on advice: • Whetheradvice on independent basis • Whether on broad or restrictedanalysis of market • Whetherongoingassessment of suitabilitywillbeprovided • How advicemeetspersonalcharacteristics of the client • Proposalsslightlybetterthan Consultation 3rd CEE Workshop, 27 October 2011, Kyiv

  39. MiFID II Draft – Key Issues Directive (II) • Among reports on the service provided, «periodic communications to clients, taking into account the type and complexity of instruments and the nature of services provided»  • No details. Difficult to judge whether better than burdensome proposals in Consultation on « ongoing services» • Portfolio Management: NO inducements (from any source) • In line with Consultation – no explanation 3rd CEE Workshop, 27 October 2011, Kyiv

  40. MiFID II Draft – Key Issues Directive (III) • Complex or non-complex? UCITS remain non-complex, except for structured UCITS • ESMA guidelines on assessment of instruments with ‘structure thatmakesitdifficult for client to understand the risk’ • «Complex»  UCITS are limited (positive), but assessmentcategoryisarbitrary – no explanation • Corporategovernance: very prescriptive requirements for management body • New and extremelydetailed (limits to cumulation of Directorships, diversityrequirements) • Inclusion of structureddepositsunderMiFID • VERY positive – part of PRIPs 3rd CEE Workshop, 27 October 2011, Kyiv

  41. MiFID II Draft – Key Issues Regulation (I) • Clearintent to extendpre- and post-tradetransparency to bonds, structured finance products and derivatives • Detailsleft to Level 2, thereforedifficult to object • Creation of OrganisedTradingFacility (OTF) covering all venues besidesRMs and MTFs • Broker Crossing Networks covered, withtradinglimited to crossing of client orders • Tradingagainstproprietary book fallsunder «Systematic Internaliser» definition • Sametransparencyrules for all types of venues  • Detailsleft to Level 2 3rd CEE Workshop, 27 October 2011, Kyiv

  42. MiFID II Draft – Key Issues Regulation (II) • Obligation to trade derivatives on trading venues (including OTFs) • ESMA determination of class or derivatives (or subset) subject to trading obligation • Proposals in line with Consultation • Extension of equity transparency to ETFs • Welcome provision, but definition still a problem, as it will catch other funds as well • Data reporting and consolidation provisions • ESMA Technical Standards on data standards and format are foreseen • No mandatory European Consolidated Tape 3rd CEE Workshop, 27 October 2011, Kyiv

  43. MiFID II Draft – Key Issues Regulation (III) • ESMA powers to temporarilyintervene • Provisions toobroad – no Level 2 foreseen • Possibility to ban distribution or services • Proposals in line with Consultation • Product intervention powers by CompetentAuthorities • ESMA only has coordination role • ESMA powers to set position limits on derivatives (ref. to position reporting provisions in Directive) 3rd CEE Workshop, 27 October 2011, Kyiv

  44. MiFID II – Next steps • Modifications proposed in all areas discussed in the Consultation • Issues can be broadly divided into «market-related» and investor protection • Drafts currently in inter-service consultation but public debate has already started in some cases • Two Working Groups could be used to deal with proposal: one on Financial Markets and one on the rest, which could also deal with PRIPs later 3rd CEE Workshop, 27 October 2011, Kyiv

  45. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • FATCA • Complex Products • PRIPS/MiFID Review/IMD Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv

  46. Corporate Social Responsibility 3rd CEE Workshop, 27 October 2011, Kyiv Commissioner Barnier envisages creation of a new 3rd category of funds (next to UCITS and AIF) instead of labeling existing ones. European Commission Consultation on Corporate Social Responsibility ongoing. Commission’s use of term “Social Responsible Fund” and expectations show fundamental differences from terminology and expectations in the industry!

  47. Corporate Governance 1st Workstream - Green Paper on Corporate Governance in Financial Institutions: • Green Paper by European Commission in Summer 2010 • Issues addressed: • Currentdeficiencies and weaknesses • Conflicts of interest • Effective implementation of corporategovernanceprinciples • Board of Directors not fulfillingitsrole as principleseat of power • Risk management • The role of shareholders not fulfillingtheirfunction • The role of supervisors and auditors • Legislative proposals to be expected in the second half of 2011/beginning 2012 3rd CEE Workshop, 27 October 2011, Kyiv

  48. Corporate Governance 3rd CEE Workshop, 27 October 2011, Kyiv 2nd Workstream - Green Paper on EU Corporate Governance Framework: • Consultation at EU Level until end July 2011 regarding Corporate Governance Framework for all listed companies and potentially all companies • Topics of particular interest: • Board of Directors (including composition, board evaluation and directors remuneration) • Shareholders (including in particular the agency relationship between institutional investors and asset managers) • “Comply or Explain” Framework – Monitoring and implementing corporate governance codes

  49. Corporate Governance 3rd CEE Workshop, 27 October 2011, Kyiv 3rd Workstream - EFAMA Code for External Governance: Adoption of the EFAMA Code by Board of Directors in April 2011 Self regulation High level principles and best practice recommendations regarding engagement between institutional investors and companies in which they invest significantly Based on the 2006 EFAMA Code of Conduct and inspired by the UK “FRC Stewardship Code” for institutional investors To be implemented on comply or explain basis

  50. Agenda • Presentation of EFAMA • Regulatory Priorities • AIFMD • FATCA • Complex Products • PRIPS/MiFID Review/IMD Review • Corporate Governance • Conclusion 3rd CEE Workshop, 27 October 2011, Kyiv

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